Pitch Like a Startup to Win Budget at Your Big Company

Many people think that only entrepreneurs need to pitch investors and raise money, but the same process is happening every day in big companies. Boards, executives, and stakeholders are trying to determine how to allocate funds just like venture capital firms and angels. As a product manager or department head in an enterprise, you need budget to fund your projects and ideas. Just like an entrepreneur, you need to craft a compelling story that demonstrates your project will generate more money than is put into it.

But what makes a good pitch?

Our Product Pitch Cheat Sheet shows you.

We’ve combined top venture capital firm Sequoia Capital’s Writing a Business Plan–the outline of the story they need to hear to invest–and the Jobs-to-be-Done product development method to generate a clear and concise guide to pitching a product idea.

Sequoia’s outline tells you what to cover, and Jobs-to-be-Done helps you answer the key questions that will give you confidence in your material, such as:

  • How do you know your problem is worth solving?
  • How do you know your solution is good enough?
  • Is your market big enough?

Whether you’re trying to find budget to launch a new product or initiative, get more resources for your team, or confirm for yourself that your project is worth pursuing, Jobs-to-be-Done can quantify the justification you need to win investment.

After the cheat sheet, you’ll find Sequoia’s outline with the JTBD guidance under each point. If you’d like to learn how to do all of this yourself in detail, don’t hesitate to contact us.


1. State the Company Purpose
As Clay Christensen says, “your customers aren’t buying your product, they are hiring it to get a job done.” A “job” is an important goal that a person is trying to achieve in their personal or professional life, such as “reach a destination on time,” “acquire a customer,” or “overcome diabetes to achieve optimal health.”

The struggle people feel in attempting to get their job done is what causes them to look for a new solution–a product to hire. We call people who are trying to get a job done “job executors.” If your company gets the job done for the job executors, they will use your product.

A direct and simple way to state your company’s purpose is to say what job you are getting done for which job executor.

Here are a few examples:

Try to make your articulation compelling and, as Sequoia says, “declarative.” The job, the job executors and the key struggle should be very clear.

If you have chosen a job that has a lot of job executors trying to accomplish it frequently and the job is famously difficult to do well, it should be immediately clear that when your company achieves its purpose, it will create enormous value.

Finally, remember that your product is not part of your purpose. For example, if you’re trying to help small businesses acquire customers, your purpose should not be to “build the fastest, easiest-to-use CRM.” Small businesses don’t want lightweight CRMs any more than they wanted advertisements in print directories. What they want is to get a job done, so express your purpose in terms that reflect helping people overcome the stress and anxiety associated with getting a job done.

2. State the Problem
Your customer’s problem is that their job is complex and difficult to execute quickly and accurately. It could even require the use of multiple solutions.

How do you know if the pain is severe enough that people are looking for a new product to relieve it? Jobs-to-be-Done helps you quantify the pain and gives you a benchmark to know if the problem is worth solving.

The key is identifying the unmet needs. In Jobs-to-be-Done, we define customer needs as “the metrics customers use to judge how well the job is going.” The metrics we use are speed and accuracy. If the job is slow and inaccurate, the customer will want a new solution.

You can interview job executors to find out what’s frustrating and time-consuming about executing the job. Then, you can survey a statistically significant sample of job executors to determine which needs are the most important and least satisfied. These are your customers’ unmet needs.

The unmet needs are the precise articulation of the customer’s struggle to get the job done. Since a job is a key goal in a person’s personal or professional life (i.e. they need to execute the job frequently and they derive value from doing it well), the unmet needs are problems worth solving–they have great value.

It’s rare, but there are times when there are no unmet needs in a job. This means you don’t have a problem worth solving. Often this is because you came up with your idea for a solution first and it’s for a job that is over-served (the job is important but perfectly well satisfied in the market). This is a problem that’s not worth attempting to solve, as no one is looking for a new solution.

But once you’ve found a collection of unmet needs, you have the problem you need to start a business. In your pitch you can say, “[job executors] are struggling to [job-to-be-done].” Then, you can state the key unmet need(s) you uncovered in the market and intend to serve with your product.

For example, if you were pitching Waze, here’s how you could state the problem:

In this problem statement, the job executors are “drivers,” the job is “reach a destination on time,” and the unmet need is “reduce the time it takes to determine if you should take an alternate route due to traffic conditions.”

Anyone who drove a car before Waze has felt this problem, which means if you state it well, it should resonate. More importantly, if you have executed Jobs-to-be-Done, you will have data to back up your statement. You will be able to show that this unmet need is worth attempting to solve.

3. Show the Solution
When presenting the solution, Sequoia says to “demonstrate your company’s value proposition to make the customer’s life better.” In other words, how is your solution going to serve the job executors’ unmet needs in the job and how do you know it will do it well enough for customers to switch to your solution from whatever they’re doing today?

Using Jobs-to-be-Done, you can measure the value of your solution. Customer needs are all metrics of speed and accuracy. Consider how long it takes to meet your targeted needs and compare that time to the existing solutions. The closer your product gets to making the job automatic and extremely accurate, the more customer value you are adding.

Instead of talking about the features of your product, frame the discussion of your solution by how quickly and accurately it meets the needs in the job. For example, if the job is overcome diabetes to achieve optimal health and you’re targeting unmet needs around reducing the time it takes to determine costs, benefits and risks of available options for the patient, then demonstrate how quickly your product enables patients to meet these needs.

4. Why now
Sequoia recommends setting up the “historical evolution of your category” and then defining “recent trends that make your solution possible.”

Combining this with Jobs Theory, this becomes “What has changed that enables you to get your customers’ job done better?”

Consider the following examples:

In the examples above, new technologies and changing regulatory environments enabled new and better ways to get the jobs done. If you look further back in history, we see that this has always been true. Think about those people that have solved a job for a large, underserved market at the right time. Some legendary examples include:

  • Karl Benz: The potential of gasoline had just started being explored; people (and things) needed a way to get from point A to point B faster.
  • Frank McNamara (the credit card): Consumer confidence in post-WWII America was rising; people needed to reduce the likelihood that not having cash on hand prevented them from buying what they needed.
  • Jeff Bezos: In 1994, internet usage was growing by 2,300% per month and was an excellent foundation for serving the needs in the job “purchase a product” better than the existing solution of stores and mail order catalogues, which gave birth to Amazon.

During your pitch, be sure to identify recent trends that show why now is the time for your product or service. The people above tackled age-old jobs by capitalizing on technological advancements that made solving those jobs easier and faster.

5. Market size
Don Valentine, Sequoia’s founder, has always stressed the importance of the market: “We have always focused on the market–the size of the market, the dynamics of the market, the nature of the competition–because our objective always was to build big companies.”

When companies flounder, it’s because they try to define the market based on product ideas rather than market needs. Then, they invest too much in the manifestation of their assumptions: their unwanted products. This is a gamble (and almost always a mistake), as it assumes there will be a line of customers waiting to use that product simply because it exists.

Before you take your product to investors, Sequoia says to calculate market size. But how do you do it? You have to carry out research to see how many people need to complete the main or related jobs your product completes. Remember: the job-to-be-done is the market—not the product.

This is why the traditional ways of examining a market are flawed. These include the following:

  • Total Addressable Market (TAM): All units sold in a product category multiplied by the price per unit.
    Served Available Market (SAM): Units sold of a specific product type multiplied by the price per unit.
    Share of Market (SOM): Percentage of customers buying a certain company’s products.

These are product-based ways to calculate market size. Jobs Theory teaches you that the target market is the job executors and a job-to-be-done.

As an example, consider the Microsoft Zune, which was an answer to the iPod. Using traditional ways of analyzing market size, Microsoft measured the iPod market, which, at the time, was in the billions of dollars (e.g. 200 million iPods sold x $150 per unit = $30 billion market). But in 2007, the iPhone and Pandora launched, getting the job of curating music done more effectively, and the the iPod market quickly dipped to $0.

Microsoft made the mistake of defining the market based on the product. The market vanished because it was defined by a product. This left Microsoft trying to grab a market share of what was essentially nothing.

Instead, with Jobs-to-be-Done, the market size should be defined based on the customer’s willingness to pay to get the job done (regardless of the products currently in the market). To size the market into an accurate dollar amount, survey customers in the market to find out how much they are willing to pay to get the job done more accurately, efficiently, and/or conveniently. The resulting number is termed the securable market—the revenue you can generate by enabling customers to get a job done better.

6. Competition
As Sequoia says, it’s “better to identify all the competitors than have the investors discover them afterwards.” How do you capture a comprehensive list that is meaningful? Which products are worth including and how do you analyze them to show that your solution can beat them?

The competition is not just similar products. It is any existing solution–a product, service, or manual process–that the job executors use to get the job done today. This view generates a much broader list and a more comprehensive understanding of what your product needs to beat.

You can show how you will beat them by eschewing the traditional feature-to-feature comparison and instead looking at how well the competition serves the needs in the job. Your customers don’t want more features, they want to get the job done, so showing that your product has more features does not demonstrate that people will adopt it.

Let’s look at the Nest learning thermostat as an example.

A typical list of competition would include other thermostat companies such as Honeywell and Emerson. The first version of the Nest didn’t include all of the features of the Honeywell programmable thermostat and it was far more expensive, so how could you have shown that it would succeed?

First, identify the customer’s job by asking, “What job is the customer hiring this product to get done?” In this case, it’s to “achieve comfort in the home.”

Next look at the needs in the job. One need is “reduce the likelihood of the home being cold when you return to it.” How quickly and accurately does a programmable thermostat serve this need? Programming the thermostat takes minutes. The schedule is rigid, so if you get home early one day and forget to turn the thermostat up, you will be cold. The time it takes is minutes and the accuracy is low. The Nest improved upon this need by controlling the thermostat based on your location. It doesn’t require programming so it meets the need faster. It’s more accurate because it will turn on the heat automatically when you are home.

By showing how much faster and more accurately your product meets the needs in the job, you can show that you will beat the competition.

7. Product
Sequoia recommends you provide a product development roadmap covering functionality, features, architecture, intellectual property, form factor, etc.

Whether your product is far enough along to show a demo or all you have is a road map of your future, be sure to focus this section of your pitch on the unmet needs. It’ll frame your story, giving your feature set meaning and showing why customers would switch to your product.

It’s critical to demonstrate how early versions of your product will serve unmet needs better than the competition. Otherwise, your audience will question why and how you will get early adoption.

In your roadmap, you can show how even though your product only gets a few needs in the job done today, over time it’ll expand to get the whole job done (and potentially expand to adjacent jobs), creating more value for the customer and a competitive moat.

8. Business model
Sequoia’s outline recommends discussing your revenue model, product pricing, average value of a customer, sales and distribution model, and customer pipeline list. Here, you must make clear who is willing to pay (and how much).

The examples of Airbnb and Facebook show how viewing your business through the lens of Jobs Theory can help you construct a sound revenue model.

Airbnb generates revenue from the job executors of the two primary jobs the product set out to serve from day one:

1. Travelers finding lodging

2. Residents providing short-term rentals

Airbnb charges a fee on the transaction because the job executors have a willingness to pay to get these jobs done.

Facebook doesn’t make money off the primary jobs it originally helped its users complete: students getting to know their classmates and staying in touch with friends and family. Instead, the mountains of user data Facebook collects created an asset to get another job done: businesses acquiring customers. The willingness to pay for this second job done is very high.

When conceiving your revenue model, first research the willingness to pay for the primary job your product gets done. If the job executors are not willing to pay for it, consider whether or getting the primary job done creates an asset that can be deployed to getting an adjacent job done where the job executors have a high willingness to pay.

Final Advice
Jobs-to-be-Done not only provides a rigorous foundation for your pitch, but it also provides a framework for you to determine if your idea is worth pursuing or to find a new idea worth pursuing. However, just because you’ve learned the language of Jobs, Job Executors, and Unmet Needs does not mean the audience for your pitch (company stakeholders, your company’s board, potential investors) knows this language. Abstract your story from the theory to drive your points home. No one needs to know what a job or a job executor is to understand that drivers struggle to reach a destination on time. Use the theory to do your homework and then tell your story in plain English.

If you have any questions, get in touch.

How Apple Can Return to Explosive Growth

The latest version Apple’s MacBook Pro hit the markets in late 2016, advertised as faster and more powerful than ever. One of its main selling points–the TouchBar–is said to make the device more versatile and easier to use.

We’re accustomed to Apple’s product enhancements being welcomed with open arms. But sales and reviews of the latest MacBook Pro buck that trend:

Apple sold nearly 4.9 million Macs in Q4 2016 for a revenue of $5.74 billion–a 14% decrease from the previous year (5.7 million Macs for a revenue of $6.88 billion).

Users of the MacBook Pro, like Alexey Semeney (CEO of DevTeam.Space), are claiming that Apple’s newest Macbook Pro isn’t a computer suitable for developers anymore.

Apple’s main changes to the Mac relate to the interface, such as TouchBar and Force Touch. They have focused on consumption jobs (making something easier to interface with), rather than functional jobs (helping users meet their goals, e.g. optimize health). Improving an interface can certainly be a worthwhile endeavor, but it’s unlikely that MacBook customers’ biggest struggles are in interfacing with the computer.

Meanwhile, Apple’s fastest growing products have made major advancements with regard to functional jobs: the iPod made it far easier to curate music, the iPhone and the app store serve dozens of jobs.

The sluggish sales of the newest MacBook Pro (and the Apple Watch) lead to bigger questions: Is Apple shifting their focus to consumption jobs rather than functional jobs? If so, what does that mean for the future of the tech giant? Let’s take a deeper look here.

Apple made its fortunes on products that get functional jobs done better than the competition

With Apple’s profits falling for the first time in 15 years in 2016, it’s worth examining how the company elevated to greatness. Because there’s hundreds of billions (and arguably trillions) at stake here.

For Apple to right the path with the Mac (and other products), it needs to return to its roots. To understand this better, it’s helpful to look at what its founder has said. Steve Jobs, upon his return to Apple in 1997, stated how the company should go about creating products:

“You’ve got to start with the customer experience and work back toward the technology – not the other way around.”

So, innovation at Apple begins with the customer experience – which means not just how the user interfaces with the product (a consumption job) but how the user can achieve a goal (a functional job). Since the functional job (e.g. communicate with a team, buy a home, optimize health) is why the market exists, it needs to be the primary focus of the customer experience. A good interface that doesn’t get a functional job done better than the existing solutions will not succeed in a market.

For example, if a new health app has a beautiful, easy to use interface, but does not help optimize your health in any way, you will likely stop using it. But a new app that clearly and definitively helps you optimize your health will be a market success (as long as its interface is good enough to deliver the benefits of optimizing your health). Craigslist is a classic example of a product that gets the functional job done so much better than the competition that consumers overlook the bare bones, dated visual design.

Apple’s success is often mistaken as “good interface design” when its true success is the result of helping customer get functional jobs done combined with good interface design.

Clayton Christensen, a Harvard Business School professor who wrote Innovator’s Dilemma and Competing Against Luck, expressed this idea succinctly, “Customers don’t buy products; they hire them to get a job done.” The reasoning for this is simple: when people struggle to get something done on their own, they’ll hire a person, product or service to get it done.

In its history, Apple has built a host of products that massively improve their customers’ ability to get important jobs done. When the product does not get a jobs done to a satisfactory level (or better than the competition), customers fire it. This could very well be what is happening with the MacBook Pro.

Michael Tsai, a software developer, writes in his blog, “Apple has either lost its way” or “it simply doesn’t care about” developers. For Tsai (and many others), the MacBook Pro’s focus on convenience, looks, and complex interface enhancements, has made it clear Apple doesn’t view the jobs developers have to get done as a core focus.

Not all is lost, though. Apple might have made a mistake, but it likely isn’t lethal. Focus and dedication to solving customer needs better than anyone else is how Apple can regain its former growth trajectory.

Apple must focus on the right innovations

As I noted in my post about Apple’s $3 trillion valuation, no company is “organized to focus on the customer experience like Apple.” The key for Apple is in not losing sight of why products should be created–to satisfy customer needs in both functional and consumption jobs.

Apple must remember failure will result if there is too much focus on consumption jobs rather than functional job. Instead, the tech giant needs to be focused again on functional jobs (like it was when Steve Jobs was there). Among Apple’s recent creations, there are two good product examples to illustrate this idea.

First, consider the Apple Watch:

  • It looks stylish.
  • It tells the time.
  • It offers faster access to notifications.

Today, the Apple Watch is mainly an interface, i.e. a consumption product, for the iPhone. Sales data shows exactly why consumption products don’t succeed on their own. (Having said that, the Apple Watch as a platform can evolve to get functional jobs done on its own; it’s just not there yet.)

During the week of April 10, 2016, the Apple Watch, sold an average of 200,000 units per day. By July, it was down to roughly 20,000 watches per day. Clearly, after the initial novelty wears off, consumption products don’t bring sustainable success and market transformation.

Now, consider the Apple CareKit (a healthcare app for the iPhone):

  • It manages medical conditions.
  • It shares health information with doctors.
  • It includes sections for treatment plans and updates.

Here, Apple gets it right. The CareKit is a functional product platform, because it helps complete jobs. On top of that, the CareKit has the ability to disrupt healthcare–an industry that needs to be more integrated and mobile.

Even more importantly, the CareKit makes the Apple Watch more useful. Right now, the Apple Watch is essentially a luxury item and accessory of the iPhone (e.g., a non-essential consumption job). It does not directly address a job customers need to get done, and low sales have reflected that reality. But the CareKit could make the Apple Watch relevant again. Its sensor capabilities have direct applications for health apps, and could make the Apple Watch a functional job product instead.

If Apple focuses on innovations like the CareKit, it could really extend its market and reassure the world that it hasn’t lost sight of the commitment to functional jobs that made it great in the first place. After all, healthcare spending in just America totaled $3.2 trillion in 2015, accounting for 17.8% of GDP. Tech products like this that solve patient and doctor needs would certainly make Apple a major player in the sector.

Apple will stay atop the throne

Even today, Apple remains the world’s most valuable company. That’s largely because of the tech giant’s ability to continually satisfy unmet needs in functional jobs.

Apple has had its recent “struggles” with the Apple Watch and MacBook Pro (struggles only relative to the iPhone’s success). If such issues continue, the company could be in trouble. But one look at its history will tell you that the company can once again innovate and stay on top.

There are numerous examples of Apple reinventing itself. For instance, in 2001, when the iPod came out, it simply waxed the competition. That’s because it was a functional product that solved customer needs much better than the competition. To this day, the iPod is the best-selling digital audio player ever.

Then, in 2007, the iPhone was released, and the world went nuts. As Horace Dediu of Asymco notes, the iPhone has been what has disrupted the Mac in many ways. It has also disrupted the iPod, since it can get listening to music jobs done much better.

Why has the iPhone been so successful? Because it’s central to a platform full of apps that get many different jobs done more effectively for users from get to a destination on time to learn a foreign language to stay in touch with friends and family. The arrival of worthy competition means Apple must continue to innovate. And that innovation must center on getting functional jobs done better than anyone else.

So, it’s not panic time yet. Judging by its history, Apple will once again innovate through a focus on functional jobs, and enjoy sustainable success.

How Apple’s Product Strategy Satisfies Needs Better Than Samsung’s

Screenshot 2016-07-28 12.09.12

Horace Dediu argues that in the mobile phone market, profit share is the key to creating shareholder value, not market share. This makes sense. You don’t want to just sell more product than your competitors (market share); you want to make more money doing it (profit share). For example, Apple sells fewer smartphones and has less market share than Samsung but Apple makes 90% of the profits in the market. It’s no surprise that Apple has the largest market cap in the world.

Samsung and Apple have similar products and operational models, but a huge disparity in profit. The Jobs-to-be-Done definition of product strategy highlights the differences between Apple and Samsung’s smartphone businesses and provides a rubric for choosing strategies that lead to gaining higher profit share than your competitors.

Here’s a traditional definition of strategy: “the set of coordinated actions that a company takes to achieve its goals.” Shobhit Chugh’s blog post and slideshare apply this definition to product management. This notion of strategy is closely related to Harvard Business School professor Michael Porter’s definition from his 1996 article What is Strategy: strategic success is based on “choosing a unique and valuable position rooted in systems of activities that are much more difficult to match.” (If you don’t subscribe to Harvard Business Review, contact us and we can get you a complimentary copy of the article.)

The focus in both of these definitions is activities. However, it’s very difficult to create a “unique and valuable position” based on activities, especially if they are operational in nature. (Porter even recognizes this in his article, stating “Constant improvement in operational effectiveness is necessary to achieve superior profitability. However, it is not usually sufficient. Few companies have competed successfully on the basis of operational effectiveness over an extended period, and staying ahead of rivals gets harder every day. The most obvious reason for that is the rapid diffusion of best practices.”) Operational activities are often straightforward enough to copy and therefore don’t lead to competitive differentiation over a long time horizon.

In fact, Samsung executes many of the same activities as Apple. Both companies manufacture hardware, sell direct to consumers, sell to retailers, conduct R&D, and market to the same customers via the same channels. Yet, Apple takes far more profit in the mobile phone market. Why?

With Jobs-to-be-Done, instead of defining strategy as a set of activities, we define it as a set of choices.

  1. Which job-to-be-done to target
  2. Which job executor to target
  3. Which platform to use to satisfy unmet needs in the job.

Here are a few examples of strategies using this definition:

Screenshot 2016-07-25 15.02.24

Screenshot 2016-07-25 15.03.36

Screenshot 2016-07-25 15.03.58

Now, let’s look at Apple’s strategy vs Samsung’s strategy. Smartphones serve many, many jobs, but for the purpose of this example, let’s zoom out and look at just three of them.

Screenshot 2016-07-28 11.40.50

What do you notice?

The platform choice in Apple’s product strategy has two major differences: a proprietary operating system (iOS) vs. an open source operating system (Android) and a proprietary app store vs a 3rd party app store.

Android has become a commodity. Any company can use Android to launch a mobile phone, which means it is very difficult to satisfy unmet needs in a job differently than the competition. In other words, it is very hard for Samsung to differentiate their Android phones from the competitors’ Android phones.

On the other hand, iOS is proprietary, unique, and specifically designed to work with Apple’s hardware and services. No other mobile phone company can use iOS, which makes it inherently differentiated, and there is a segment of customers willing to pay a premium for the satisfaction iOS delivers to them relative to Android.

Samsung’s commodity OS forces them to attempt to differentiate mostly on hardware. By enhancing the hardware alone Samsung cannot add as much value to the needs in the job as Apple can by improving their hardware and software together. Samsung’s investment in Tizen, an “operating system built from the ground up to address the needs of all stakeholders of the mobile and connected device ecosystem” is evidence that they too believe their platform choice is holding them back – not from market share, but from profit share.

By looking at Apple’s Product Strategy choices through the lens of Jobs-to-be-Done, you see how they set themselves apart beyond simply choosing a different set of “activities.”

The JTBD definition of product strategy can keep product teams focused on delivering results for the customer. It’s clear, it’s specific and it’s easy to put on the wall and rally your team around it.

The Jobs-to-be-Done method helps you choose the strategy that will deliver higher profit share than your competitors. Here’s what you do:

  1. Define your customer’s job-to-be-done
  2. Identify the Customer Needs in the job-to-be-done
  3. Quantify the importance and satisfaction of the Customer Needs
  4. Segment the job executors based on unmet needs
  5. Analyze how well the competition satisfies the customer needs
  6. Make choices about product strategy using the following criteria:

Choose the job-to-be-done that has the most under-served needs for your customer.

Choose the job executor who will generate the highest value market based on their willingness to pay to get the job done and the number of job executors.

Choose the platform that can satisfy the unmet needs for your chosen job executor with the lowest amount of risk. The cost and risk of getting the job done for this job executor are critical. If it’s too expensive and too risky, it’ll eat into your profit.

These are the three choices that will lead you to a differentiated product strategy that can beat your competition. Of course, you’ll also need superb execution, but that’s another topic for another day.

Why not take a moment to ask your team what your product strategy is? Is your team using a definition based on operational activities or do you have a product strategy based on your customer’s job-to-be-done? If you find they aren’t aligned on what strategy to choose or even what a strategy is, get in touch with us here at thrv. We can help.

The Math Behind Warren Buffett’s $1 Billion Stake in Apple

The news of Berkshire Hathway’s billion dollar stake in Apple reminded me of a post I wrote in January, 2014 explaining the math behind valuing Apple at over one trillion dollars.

From Matt Phillips at Quartz “Apple is the New IBM” and Timothy Green at Motley Fool “Apple is Not a Warren Buffett Stock” to Daniel Sparks at the same publication “Warren Buffett is Right: Apple, Inc. Stock is Undervalued” and John Gruber “Apple has long struck me as the sort of company Berkshire likes to invest in” opinions and interpretations of Buffett’s investment have been all over the map.

To add to the conversation, I’ve reposted my January 2014 thoughts here. This is likely how Warren Buffett valued Apple before he invested.

Apple just released impressive quarterly results: $57.8 billion in revenue, 51 million iPhones, 26 million iPads, 4.8 million Macs, and 6 million iPods sold. So how should we value Apple? How much is a share of Apple really worth?

Let’s combine a few things to value Apple: (i)Warren Buffett’s intrinsic value model, (ii) market disruption theory, and (iii) jobs-to-be-done innovation theory.

To read the headlines, you might think Apple is, again, doomed: “Apple’s Shares Slump on Weak Forecast” and “Apple iPhone Shares, Outlook Come Up Short” are just two examples. These headlines always encourage people to tell Apple what they must do, and John Gruber wrote about the problem with this approach.

If you look at any valuation number for Apple (for example, a P/E of 12.6, an EBITDA multiple of 8.4) it is remarkably low relative to its competitors (for example, Google has a P/E of 32.2 and an EBITDA multiple of 18.6).

To put this into perspective, if Apple had Google’s P/E, it would be worth $1.2 trillion (yes, trillion with a “t”) instead of the $452 billion it is worth today. So why is Apple valued with a multiple so much lower than Google?

The Buffett model is important because it will tell us what assumptions we should analyze to determine Apple’s value and ultimately its multiple. The model is straightforward: a company’s value is based on its ability to generate future cash for its owners (what Buffett calls “owner earnings”). We can analyze Apple’s owner earnings by taking its net income plus depreciation and amortization less capital expenditures. This number was $34.7 billion for the 2013 fiscal year.

The key to the Buffett model (and any valuation model, really) is projecting the growth rate of this owner’s earnings number. If we assume a future growth rate we can determine the company’s value. All of the future owner earnings are discounted back to today’s dollars to determine the value of the company. The trick, of course, is being accurate about these growth assumptions, which is where disruption theory and jobs-to-be-done theory can help us.

If we assume that Apple will grow its owner earnings at 5% for the next 10 years, and then 2% for all years after that (with adjustments for cash and debt), Apple’s market cap wouldn’t be $453 billion. It wouldn’t even be $1.2 trillion. It would be $3 trillion. This is a share price of $3,275 in contrast to today’s share price of $506. At just 5% annual growth for Apple.

Here is the math behind this valuation:

Intrinsic Value AAPL

Let’s put this in perspective: from 2004 to 2013, Apple grew at a compound annual growth rate of 74% (meaning it grew owner’s earnings basically 74% every year, see the chart above). That is impressive, but not likely to continue forever. So how do we determine if this historical growth rate will slow to 5% then 2%? As Horace Dediu and Jesse Felder have noted, the market is undervaluing Apple’s ability to produce future cash flow, so understanding this growth rate assumption is critical to our assumptions.

Disruption helps us analyze Apple’s future growth rate because (i) Apple’s recent growth has been based on the premium iPhone and (ii) disruption ends up displacing the premium players in a market.

A quick review: Clay Christensen first described disruption as the “process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.” (Christensen somewhat famously analyzed the iPhone’s disruptive power incorrectly, but the theory of disruption is still correct).

So will Apple be disrupted? If they were, their growth rate would clearly slow, and thus their valuation would fall as well. The market seems to be saying that Apple will almost certainly be disrupted.

But let’s look at an interesting chart tweeted by Jason Snell. It shows Apple’s percentage revenue by product.


If we simplify this a bit, it looks like almost exactly like the classic disruption theory chart explaining how incumbents over-serve the market at the high end, while a low-end entrant starts at the bottom of the market, but takes over to become the dominant player.

Here is the simplified Apple chart:

Apple Disruption
And here is the disruption theory chart:


But there is a fundamental difference between the two. In disruption theory, it is a new entrant who disrupts the incumbent. But in Apple’s case, the iPhone and the iPad are an example of self-disruption. Apple disrupted the Mac (and the PC) with the iPhone and iPad. While the Mac continues to be a healthy high-end product, Apple absolutely destroyed its own iPod. Six years ago, the iPod was almost half of Apple’s revenue. In the latest quarter, iPod sales fell by 50%.

MG Siegler noted that Apple “wants to be the ones to disrupt themselves… But never with stakes this high…” But I would argue the stakes were incredibly high when Apple decided to disrupt the Mac and the iPod (both about 100% of their revenue) at the same time. And history is a good indication that Apple is probably thinking about disrupting the iPhone, even now. A truly disruptive product to the iPhone might not emerge for years, but I can’t think of another company that would prepare for and execute a self-disruption strategy like Apple. It is in their culture to do it, as long as the new product is insanely great. As a result, Apple deserves a higher future growth rate than the market is currently giving it.

Disruption theory is a good tool to analyze what happens to companies, but it is not a good tool to help companies figure out what to do. How do you respond to disruption? When is the right time to disrupt? How do you disrupt yourself before a competitor does? These are the really hard questions.

The answer is jobs-to-be-done (JTBD) theory, popularized in Christensen’s Innovator’s Solution. In short, JTBD theory shows that markets should be defined not by products, which change (and are disrupted) over time. Markets should be defined independently of any product. They should be defined based on the job the customer needs to get done. Products change, jobs are stable.

The iPod is a great example. Microsoft made the mistake of targeting the “iPod market” with the Zune. But JTBD theory shows us that there is no such thing as an iPod market, just as there isn’t a cassette market, an LP market, or a CD market. Companies get disrupted because they define the market based on their product, not on the customers job-to-be-done, e.g. the markets for listening to music and discovering new music.

And even simple jobs are extremely complex. Every job has 50 to 150 different customer needs that are independent of any product or solution.

This is the real reason Apple succeeds: they focus on jobs and the customer needs. In the recently discovered Lost Interview with Steve Jobs, we get a look at how Jobs thought and how I think Apple as a company innovates. Jobs says designing a product is a process of “keeping 5,000 things together in your brain” and getting them to fit together. In addition, while people frequently think Jobs said “customers don’t know what they want,” he actually never said that. What he did say was: “you can’t just ask customers what they want and then try to give that to them. By the time you get it built, they’ll want something new.” And second he said, “you’ve got to start with the customer experience and work back toward the technology–not the other way around.”

So this is how Apple innovates: they don’t ask customers what product they want, they focus on the job they are trying to get done (the customer experience), the hundred of needs required to get the job done (the details of the customer experience) and the different technologies and solutions to get the job done best (the “5,000 things” are the 50 to 150 needs combined with an almost infinite number of possible product solutions).

I have worked with a lot of companies over 25 years, and almost none think like Apple and are organized to focus on the customer experience like Apple. And I have been an Apple customer continuously since 1979. If Apple is acquiring new customers today that have even a tiny percentage of my loyalty to Apple products (and I buy them because they help me get important jobs done better in my personal and professional lives), then they will almost certainly be able to sustain at least a 5% growth rate.

Finally, let’s look at Apple’s product success rate vs. Google. This is another important number, like a batting average for a baseball player. Who would you rather bet on? A player with a .175 average or one with .400?

I am sure my list isn’t complete, but if you look at the Google Graveyard of products and the history of Apple launches (from the new Jobs era), Google has about a 7% success rate and Apple has about a 90% success rate. My quick analysis is here (Download Apple vs. Google), and while I am sure it isn’t entirely accurate, it is generally correct.

So in summary, this is Apple:

1. A company with a track record of growing at 74% per year.

2. A company that knows how to disrupt its own products better than any other company.

3. A company that knows how to focus on the customer’s job-to-be-done.

4. A company with a 90% product launch success rate.

It is a good bet that Apple will beat a 5% growth forecast over the next ten years…